It’s a well-known fact that dropshipping is a unique business model and offers a lot of conveniences. This business model, however, requires a slightly different approach than retail when it comes to pricing.
For many business owners, pricing of the products, calculation of margins, and revenue understanding could all be overwhelming concepts. Nevertheless, you must understand that pricing plays an important part and it’s required to understand how it works.
As a business owner, you need to identify a sweet spot of being competitive while also making sure of having good margins.
Before we identify how to price your products, let us clarify some concepts. Price is based on the cost of the products you sell. This includes the purchase price, shipping costs, and taxes you pay. Revenue is the money generated from sales and the term markdown refers to the retail sales price minus the wholesale price. Profit margin is defined as the amount in which revenue from sales exceeds costs incurred. This factor should drive all pricing decisions for the business.
There are two kinds of pricing models you should know before you put a price tag on your work:
- Cost-based pricing – Adding a markup to the product’s cost.
- Value-based pricing – Set a price based on the perceived value of the product by the customer.
Both these strategies have their advantages and disadvantages.
We have come up with a list of factors to keep in mind to give your profit margins a boost.
Price according to the products
Choosing the right dropshipping industry is important. The profit margins depend on the products. The percentage cannot remain constant for all products you sell. Products of low ticket sizes may have higher margins. However, this may also mean, you will have to sell more of these products to make sufficient revenue. To make most of your sales, pricing and profit margins have to be product-specific.
Analyze your competitors
Always be aware of your competition and learn from the success and failures of others. The price points of established brands should give you some idea. Analyze how many e-commerce sites sell the product you wish to sell and look at the pricing. Competitor research will also help you differentiate and sell variations of the same product. This can give you a unique standing.
Understand the Demand
Some products have seasonal requirements. This factor impacts pricing. The demand for products affects the pricing. Pricing strategies do not remain uniform for all products in all seasons. Understand the time, market, and its demand. These factors greatly determine your price point and profit margin.
Think of a long-term pricing strategy
Selling products at higher products may get you fast and high profits, but you got to build a sustainable strategy that can help you make a mark in the business. Pricing should be in line with your brand value and long-term goals. Consider how you’d want your business to be perceived for the next 10 years i.e., do you want customers to see it as low-cost fast products? or high cost premium products? even better, low priced but high valued products?
Factor in your costs in marketing and advertising
Advertising costs play an important role in dropshipping. Be it google ads, Facebook ads, or developing a marketing strategy, they are all your valuable efforts and investments made on the product. Do not negate these costs or any smallest of costs for that matter, you need to include them all in your pricing to make sure you know your profits well.
Make your product attractive and give customers offers such as free shipping that makes them feel they got the best deal! Factor these into your costs and come up with a profitable pricing model that meets industry standards. Pricing is never stagnant, it can be modified as the business grows and as the market landscape changes. Pricing may also need some experimentation till you identify a sweet spot. Try different strategies and markup rates to come up with a profitable business. The financial risk involved in dropshipping is less, so it is ok to experiment a bit till you arrive at an apt retail price.
Have clarity on your short-term and long-term goals to build a sustainable business model. Make most of your understanding of the market, customer behavior, and seasonality of product and take wise decisions.
We hope these tips would help you price your products right.
At Baapstore, we work with thousands of online sellers every day, and should you have any queries or need to discuss or know about something, feel free to write to us.